It is Well with my Soul" (IWMS) Co. is evaluating an investment proposal to manufacture GB pen drives, which has performed well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared. Initial investment GH¢ 3 million Selling price (current price terms) GH¢ 20 per unit Expected selling price inflation is provided as follows: Years 1 2 3 4 Selling price Inflation rate 3% 4% 5% 6% Variable operating costs (current price terms) GH¢ 8 per unit Fixed operating costs (current price terms) GH¢ 150,000 per year Expected operating cost inflation 5 % per year The research and development division has prepared the following demand forecast as a result of its test marketing trials. The forecast reflects expected technological change and its effect on the anticipated life-cycle of GB pen drives. Years 1 2 3 4 Demand (units) 60,000 70,000 120,000 45,000 It is expected that all units of GB pen drives produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. Terminal value or machinery scrap value of GH¢ 50,000 is expected at the end of four year, when production of GB pen drives is planned to close. Required: Explain the term “cashflows” Clearly state two ways on how will you distinguish between cashflows and profits of a company Identify any five (5) uses of cash flows in a business organization
“It is Well with my Soul" (IWMS) Co. is evaluating an investment proposal to manufacture GB pen drives, which has performed well in test marketing trials conducted recently by the company’s research and development division. The following information relating to this investment proposal has now been prepared.
Initial investment GH¢ 3 million
Selling price (current price terms) GH¢ 20 per unit
Expected selling price inflation is provided as follows:
|
Years |
1 |
2 |
3 |
4 |
|
Selling price Inflation rate |
3% |
4% |
5% |
6% |
Variable operating costs (current price terms) GH¢ 8 per unit
Fixed operating costs (current price terms) GH¢ 150,000 per year
Expected operating cost inflation 5 % per year
The research and development division has prepared the following demand
Years 1 2 3 4
Demand (units) 60,000 70,000 120,000 45,000
It is expected that all units of GB pen drives produced will be sold, in line with the company’s policy of keeping no inventory of finished goods. Terminal value or machinery scrap value of GH¢ 50,000 is expected at the end of four year, when production of GB pen drives is planned to close.
Required:
- Explain the term “cashflows”
- Clearly state two ways on how will you distinguish between cashflows and profits of a company
- Identify any five (5) uses of
cash flows in a business organization - Determine the relevant cash flows to be used to appraise the proposal of the manufacture of the GB pen drive.
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